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'Fake News' Can't Obscure Russia's Investment Surge

Despite sanctions, and on the heels of a power change in Washington, companies are lining up to invest in Russia

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This post first appeared on Russia Insider

 Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia

You are far less likely to be the victim of today’s ever popular “fake news” if you simply follow the money as it rarely deviates from facts on the ground. That is unless diverted by sanctions, skullduggery and other artificial regulatory obstacles. It is therefore worth noting that foreign direct investment into the Russian economy grew by 62% in 2016 to $19 billion against a global 13% decline. This was released by the United Nations Conference on Trade and Development last week in its Global Investment Trends Monitor.

Over the course of the Ukrainian sanctions regime against Russia, many companies have quietly continued to increase their investments in Russia. While Moscow has been threatened ad nauseum by Western leaders with the possibilities of new sanctions, such warnings have not served as a deterrent for serious business.

Trading relations between international markets and Russia have also been depressed by the subsequent dramatic post-sanctions move of the Russian ruble’s exchange rate in December 2014. The collapse in the ruble rate resulted in the Russian currency weakening to historically low levels at the start of 2015, trading at around the 100 level, compared with a previous level of around 36 and today’s of around 59.

As various countries in the European Union prepare for a gaggle of key elections throughout 2017, it is telling to see how much effort, resources and energy are being expended by EU & US companies in efforts to re-enter the Russian market despite misguided political game playing. The lifeblood of any healthy business is to seek out and participate in the benefits of economic growth.

While conditions for doing business in Russia have improved for many western companies, providing access to financing for their counter parties remains a challenge. The existing sanctions regime places restrictions on many Russian lenders from doing business with their European colleagues except for retail. The Moscow Exchange (MOEX) is doing its part in developing new financial products and access to financial instruments which are playing a role in easing paths to financing and hedging risk.

Rising investment interest also has political force. Russian authorities and businesses hope that naturally expanding investment and trade volumes seen in 2016 and strongly continuing into 2017 will exert pressure on the US and EU to reassess their own real interests, and in so doing relax or better still trash the current sanctions regime against Russia.

One of the factors spurring foreign companies to localize some of their operations in Russia is the simple truth that otherwise they will further lose prior-to- sanctions market share to import substitution locally manufactured. OPKO Russian Market Partners gives an example; the sales leaders for bulldozers to Russia were traditionally Caterpillar, JCB, and others. As of December 2016 the little known Chelyabinsk Tractor Factory opened a new state of the art conveyor assembly plant producing bulldozers that are of competitive high technical quality and affordable in ruble terms. Similar new investments are ongoing that relate to pipe-layers, haulage equipment, and the list goes on. The “made in Russia” sticker as never before has qualitative commercial value and the legal teeth to ensure continued growth.

The landscape of foreign bilateral direct investment shows no signs of slowing down. Direct investment by Germany alone in spite of Angela Merkel rose to 2.05 billion euros in the first nine months of 2016. That volume surpasses the amount for all of 2015 and contrasts with net outflow in 2014.

The investment surge shown by international companies is also the beneficiary of domestic incentives crafted by Moscow to attract foreign businesses. A Russian program initiated in early 2016 offers foreign firms “Special Investment Contracts” (SIC’s). The contract subsequently awards companies the same status as domestic producers and traders, thereby making them eligible to apply for Russia state contracts and special significant tax benefits provided they produce the majority of their product in Russia.

The political winds are slowly changing, meanwhile many companies worldwide are not waiting for the roadblocks to be removed, and are getting back to business with Russia, which is in everyone’s true interests.

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